Markets & Finance

Dow Plunges 680 Points on Economic Woes


The S&P 500 and Nasdaq each tumbled nearly 9% Monday after dismal reports on U.S. manufacturing sentiment and construction spending

Different month, same stock market.

U.S. stocks suffered a sharp sell-off on the first day of December, and closed at their worst levels of the session. The large-cap S&P 500 index and the technology-heavy Nasdaq composite index each sank nearly 9%. The declines in major U.S. indexes erased most of the gains from the market's five-session rally.

On Monday, the Dow Jones industrial average finshed lower by 679.95 points, or 7.7%, at 8,149.09. The broad S&P 500 index dropped 80.03 points, or 8.9%, to 841.35. The tech-heavy Nasdaq composite index sank 137.50 points, or 8.95%, to 1,398.07.

Things were even worse in other corners of the market. The S&P MidCap 400 index tumbled 10.9% Monday.

The U.S. stock market "is facing a new round of selling pressure as the financial picture is still a question mark," said Jay Collins of DT Trading in Chicago. "[The U.S. jobs report] due on Friday is the news story of the week and is expected to reinforce the bleak jobs picture that lies ahead."

"The downturn happened so fast today there wasn't much chance to position for it," said S&P technical analyst Chris Burba.

Wall Street was spooked by fresh reminders of economic weakness in the U.S. and around the globe. Among the items driving the selling: A report released Monday by the Institute of Supply Management showed that U.S. manufacturing contracted at the steepest rate in 26 years in November. Another reports showed construction spending slumping in October.

To put an exclamation point on the economy's troubles, the National Bureau of Economic Research's business cycle dating committee, widely recognized as the arbiter of U.S. recessions, said the economy began its current downturn in December, 2007.

Meanwhile, Treasuries experienced an enormous rally as investment capital flowed heavily

out of equities. Traders cited speculation of more rate cuts by the Federal Reserve and possibly government purchases of Treasuries in order to keep yields down and support lending.

Oil futures plunged to finish below $50, their lowest close in three years. The U.S. dollar index was higher. Gold futures plunged on demand worries.

Fed Chairman Ben Bernanke said Monday that the central bank will act as needed to preserve the viability of key institutions and that

further interest-rate reductions are "certainly feasible." Bernanke said the economy remains under "considerable stress" and acknowledged that the Fed's various liquidity programs have failed to return private credit markets to normal.

Also, U.S. retail data from the first weekend of the holiday shopping season were mixed and "not really impressive" according to S&P MarketScope.

On the New York Stock Exchange Monday, 28 stocks were lower in price for every four that posted gains. The ratio on the Nasdaq was 24-4 negative.

Equity markets in Europe finished sharply lower, with major indexes down 5.2% in London, 5.9% in Frankfurt, and 5.6% in Paris registering declines. Asian markets ended mixed, with Tokyo stocks falling 0.9%, Hong Kong climbing 1.6%, and Shanghai gaining 1.3%.

Wall Street looked to news on the retail sector as the all-important holiday shopping season kicked off on Friday, Nov. 28. "We believe consumers remained spooked by market turmoil and refrained from shopping during [November]. We are projecting one of the weakest Holiday shopping seasons on record," wrote Merrill Lynch analyst Lorraine Maikis in a note Monday.

Technology shares were hard-hit Monday. Intel (INTC) was among the stocks leading the way lower with a decline of 9%. The Semiconductor Industry Association reported Monday that worldwide sales of semiconductors declined 2.4% in October to $22.5 billion compared to sales of $23.0 billion in October, 2007.

Among the other industry groups hard-hit in Monday's session: The S&P Investment Banking & Brokerage index fell 15.2% as Ladenburg Thalman analyst Richard Bove cut his earnings estimate for Goldman Sachs (GS), citing the impact of changes in the value of the company's holdings in China and Japan.

The S&P Oil & Gas Exploration & Production index plummeted 14.8% amid the sharp decline in crude oil futures.

The Diversified Metals & Mining index slumped 12%. Bloomberg reported that copper fell for a second day in Shanghai after China's contraction in manufacturing signaled the growing risk of a slump in the world's biggest consumer of the metal. The S&P Gold index fell 8.1% amid a sharp drop in prices for the yellow metal.

The Automobile Manufacturers index dropped 8.7% amid fresh developments in the beleaguered sector. Ford Motor Co. (F) announced that it will re-evaluate strategic options for Volvo Car Corp., including the possible sale of the Sweden-based premium automaker. Ford said the decision comes in response to the significant decline in the global auto industry particularly in the past three months and severe economic instability worldwide.

General Motors' (GM) management on Sunday was racing to finalize a viability plan to take to Congress, with a boardroom hellbent on securing a federal rescue loan, according to a Wall Street Journal report. At the same time, directors -- unlike chief executive Rick Wagoner -- are also insisting that all options stay on the table, including a Chapter 11 bankruptcy filing, if a bailout doesn't come through, said the Journal.

In U.S. economic news Monday, the National Bureau of Economic research declared a U.S. business cycle peak in December of 2007, which means that the current recession now officially started in January, as most economists including ourselves had assumed. The decision was made in a conference call last Friday, and largely reflects the peak in payroll employment in December of last year.

The Institute for Supply Managment's manufacturing index fell to 36.2 in November, after diving 4.6 points to 38.9 in October, as the contraction in manufacturing picked up speed. The November figure is the lowest level since 1982. The employment index dipped to 34.2 from 34.6, and was at a relative high at 51.9 in July. The new orders component dropped to 27.9 from 32.2. The production index fell to 31.5 from 34.1. Prices paid plunged to 25.5 from 37.0; that index was at 91.5 in May.

"Both households and businesses are deleveraging rapidly, just as banks did over the past year, and the pull-back is sharply impacting spending and output as gauged by the November sentiment indicators", says Action Economics.

U.S. construction spending fell 1.2% in October, after flat reading in September (revised up from -0.3% previously). On a year-over-year basis, spending is off 4.6%, not quite as bad as the prior pace. Residential spending remained very weak, falling 3.5% and is down 23.6% from a year earlier. Nonresidential spending dipped 0.1% but is up 9.1% year-over-year. Public spending rebounded 0.7% after a 0.9% decline in September. Private spending fell 2.0% after a 0.4% increase in September.

Federal Reserve Chairman Ben Bernanke said in a speech Monday that further interest-rate reductions are certainly feasible, but added the scope for conventional rate policy remains limited. He said that the monetary and fiscal stimulus will help the recovery, and that he sees some signs of stabilization in the financial markets. However, labor market conditions worsened in November, and economic activity has downshifted further. He believes economic conditions will remain weak for a time longer though he suggested together with international partners will restore confidence and get the economy back on track.

Widely followed equity analyst Meredith Whitney of Oppenheimer (OPY) believes the U.S. credit card industry may pull back more than $2 trillion of lines of credit over the next 18 months.

Looking at economic developments outside the U.S., the UK is "closer than ever before" to joining the EUR, according to the president of the European Commission, Jose Manuel Barroso. Speaking on a French radio show, he said British politicians were considering the move because of the effects of the global credit crunch. However, Downing Street said its position on the euro remained the same. Barroso acknowledged "the majority" of British people continued to oppose joining the eurozone. But he said the recent economic uncertainty had made the currency a far more attractive option.

Meanwhile, the chairman of the Bank of Japan's policy board decided to call an unscheduled monetary policy meeting on Tuesday. "The purpose of the emergency meeting is to discuss monetary control matters," the BoJ said.

Among companies in the news Monday, Ford Motor Co. (F) announced that it will re-evaluate strategic options for Volvo Car Corp., including the possible sale of the Sweden-based premium automaker. Ford said the decision comes in response to the significant decline in the global auto industry particularly in the past three months and severe economic instability worldwide.

General Motors' (GM) management on Sunday was racing to finalize a viability plan to take to Congress, with a boardroom hellbent on securing a federal rescue loan, according to a Wall Street Journal report. At the same time, directors -- unlike chief executive Rick Wagoner -- are also insisting that all options stay on the table, including a Chapter 11 bankruptcy filing, if a bailout doesn't come through, said the Journal.

General Electric Co. (GE) shares fell after Merrill Lynch cut its EPS forecasts on the diversified conglomerate to reflect the incrementally worse industrial and financial services environment.

In other U.S. markets Monday, Treasuries rallied. The 10-year note surged 47/32 in price to 108-21/32 for a yield of 2.75%. The 30-year note roared up 130/32 to 123-28/32 for a yield of 3.24%.

The U.S. dollar index was higher at 86.48.

January West Texas Intermediate crude oil futures fell more than $5.00 to end the New York session at $49.28 per barrel, the lowest close in more

than three years, according to Bloomberg. At a Nov. 29 meeting in Cairo, the Organization of Petroleum Exporting Countries, which supplies approximately 40% of the world's oil, postponed a decision on a cut in output until the Dec. 17 meeting in Algeria. OPEC said it will use this time to gauge the impact of the 1.5 million barrel a day cut announced in October.

February gold futures were down $41.20 to $777.80 per ounce at 2:05 p.m. ET, the biggest one-day decline in about eight months, amid speculation that demand for the yellow metal will weaken as the global economy continues to struggle.

Among Monday's stocks in the news, Mentor Corp. (MNT) agreed to be acquired by Johnson & Johnson (JNJ) in a deal valued at about $1.07 billion in cash. Mentor shareholders will get $31.00 per share.

Aon Corp. (AOC) announced that it had completed its acquisition of Benfield Group Ltd. for GBP 3.50 per common share and GBP 2.80 per preference share, in each case in cash; and the assumption of GBP 91 million of Benfield's net debt, representing an enterprise value of approximately GBP 935 million. In connection with the acquisition, Aon announced a global restructuring plan, with cumulative costs of about $185 million and estimated job cuts of 500 to 700 positions.

Two months after converting to a bank-holding company, executives at Morgan Stanley (MS) are considering a variety of scenarios to increase deposits, including acquisitions of regional banks with a customer base that overlaps with the company's existing brokerage and asset-management clients, according to a Journal report.

Parametric Technology (PMTC) announces that it has increased its share repurchase authorization from $50 million to $100 million.

DHT Maritime (DHT) says it reached agreement with Overseas Shipholding Group (OSG) whereby OSG has declared part of extension options for the seven vessels on time charter from DHT upon expiry of the vessels current initial charter periods. DHT says the declared extensions increase its fixed charter coverage from an average of 3.7 years to 4.6 years for the total fleet of 9 vessels. DHT notes that its contracted fixed charter hire revenues will increase by a minimum $70 million to about $400 million as a result of the extensions.


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